Question

E22-23. Activity Based Budget

Highlands Industries has the following budget information available for February:

Units manufactured	30,000
Factory administration	$65,000
Assembly	½ hour per unit x $12
Direct materials	2 pounds per unit x $4
Inspection	$250 per batch of $1,000 units
Manufacturing overhead	$5 per unit
Product development	$20,000
Setup cost	$15 per batch 0f 1,000units

Required

a.       Use activity-based costing to prepare a manufacturing cost budget for February. Clearly distinguish between unit, batch and facility-level costs.

b.      The operating managers at Highland Industries are concerned that the budgeting process is too time-consuming and diverts attention from their current day-to-day responsibilities. Discuss the reasons that Highland should continue budgeting.

Answer 1

Thank you for your patience. Please give positive ratings so I can keep answering. It would help me a lot. Please comment if you have any query. Thanks!

Highlands Industries
Workings for answer a
Calculation of costs	Amount $	Note
Assembly costs
Units manufactured	30,000.00	A
Hour per unit	0.50	B
Cost per hour	12.00	C
Assembly costs	180,000.00	D=A*B*C
Direct materials costs
Units manufactured	30,000.00	See A
Pounds per unit	2.00	E
Cost per pound	4.00	F
Direct materials costs	240,000.00	G=A*E*F
Inspection costs
Units manufactured	30,000.00	See A
Units per batch	1,000.00	H
Cost per batch	250.00	I
Inspection costs	7,500.00	J=A*H*I
Manufacturing overhead costs
Units manufactured	30,000.00	See A
Cost per unit	5.00	K
Manufacturing overhead costs	150,000.00	L=A*K
Setup costs
Units manufactured	30,000.00	See A
Units per batch	1,000.00	M
Cost per batch	15.00	N
Setup costs	450.00	O=A*M*N
Answer a
Manufacturing cost budget	Amount $	Remarks
Factory administration	65,000.00	Facility-level costs
Assembly	180,000.00	Unit-level costs
Direct materials	240,000.00	Unit-level costs
Inspection	7,500.00	Batch-level costs
Manufacturing overhead	150,000.00	Unit-level costs
Product development	20,000.00	Facility-level costs
Setup cost	450.00	Unit-level costs
Total Manufacturing cost	662,950.00

Answer b

Budgeting is important for an organization for various reasons:

1. It is useful to control costs at the earlier stage.

2. It is used to identify variances and department responsible for them.

3. Standard cost of any product is calculated through budgets.